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How shareholders are rewriting the rules for public company directors

AMY FREEDMAN

Special to The Globe and Mail

Published November 14, 2016Updated April 8, 2017

This column is part of Globe Careers' Leadership Lab series, where executives and experts share their views and advice about leadership and management. Follow us at@Globe_Careers. Find all Leadership Lab stories attgam.ca/leadershiplab.

The job description for Canadian directors has changed. The problem is no one told them. The owners of public companies, shareholders, have re-written their expectations when it comes to the level of access they demand from those they elect. In fact, director-shareholder engagement is becoming a prerequisite for high shareholder support.

Gone are the days when a board could sequester itself behind closed doors and only encounter shareholders in line for coffee and tiny sandwiches at the annual meeting. The paradigm for shareholder communication has been set up backwards. It has been structured to protect – not engage – directors from shareholders by filtering contact through management. Traditionally it has been the role of the investor relations team to engage investors, involving management as appropriate. Now directors are expected to engage shareholders on a regular basis to speak to issues management can't.

Shareholders are looking to increase their confidence in the long-term strategic direction of the company, understand the board's role in providing oversight and risk management, discuss governance issues like compensation or succession planning, or, in some cases, raise concerns about management itself. All issues that may be obscured if management alone is relied on to share sentiment with board.

Companies slow to move toward board level shareholder engagement will find the bar is being set for them by the companies who have and their shareholders will compare –and hold them accountable – on that basis. Boards who have been the early adopters in this new paradigm have started to look at experience in engaging investors as a necessary skill when selecting new directors.

In the next three years, we predict virtually all of the S&P/TSX 60 and a significant portion of the TSX will have an active shareholder engagement program involving directors. Already some 40 S&P/TSX 60 issuers discuss shareholder engagement in their information circular and that number is likely higher when you consider those who don't disclose.

Despite increasing pressure to improve shareholder engagement, too many boards are dragging their heels. The most common excuse is based on the fallacy it is best to let sleeping dogs lie. Companies thinking they can avoid an issue by not talking about it or not discovering it are usually mistaken. If you have identified a tough question you don't want to answer, chances are shareholders have, too. If an issue is going to arise from a meeting with a shareholder, when would you prefer to deal with it? Before your circular is published so you can address it, or after when the only option for a shareholder might be to vote against you?

At times, the process of engaging shareholders may be uncomfortable as directors are forced to confront some difficult truths about their company and even about their own personal performance. But if boards are to oversee management and be accountable to shareholders they need a firsthand dose of reality and be seen as actively engaged.

Despite whatever hesitation might exist, the only time director-shareholder engagement does not go well is when the directors are not prepared. Meeting with shareholders provides an opportunity to showcase directors' expertise, create self-awareness, and build personal capital.

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When boards hear 'shareholder engagement' they should think 'shareholder trust'. Having an established dialogue between directors and shareholders can empower and embolden boards to make the tough but necessary calls, notably during a strategic review, hostile bid, or activist situation. Improved director-shareholder communication is a cross-cutting theme that, if acted on, can make a lot of the other problems boards face, like a lack of support for say-on-pay or concern about diversity, disappear.

To do it effectively tone from the top is important. Independent directors need to assume a leadership role. The message needs to be you value a culture where shareholder voices matter.

While there is no cookie-cutter approach that works for all boards and all shareholders, there are some key principles to consider:

Know how your shareholders think, including their voting history and who within the fund makes the voting decisions.

Most institutional investors have developed voting policies that reflect their investment approaches, so it is critical to understand if there is a governance voice outside of the portfolio manager you most often deal with.

Don't wait until you need to engage to engage.

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Crisis prevention trumps crisis management. Directors should be talking to shareholders before an issue boils over and well ahead of proxy season. Not only are investors less busy then but, more importantly, decisions have yet to be solidified.

It can't be one-and-done.

Like any relationship, an encounter with a shareholder can't be a one-way, one-and-done communication if it is meant to last for the long-term. Directors don't need to be talking to investors daily, and it doesn't need to be the same director in every meeting, but shareholders need to know directors are available on a regular basis.

Close the feedback loop.

Any shareholder communication program that simply absorbs shareholders' views but does not reflect them and the action taken back to shareholders is destined to fail.

The advice often given to boards seeking to be proactive on shareholder issues is to 'think and act like an activist'. The advice should be to 'think and act like an independent director representing shareholders to management, not the other way around'.

There is a strong correlation between the relationship a board has with its shareholders and their likelihood of success when faced with adversity: the more frequent and closer the contact, the greater the chance of success.

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